DOC - Anglorand Financial Services Group

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DOC - Anglorand Financial Services Group ...

    May 2002



    ? SA Consensus Outlook

    ? The Benefits of being patient in Investment

    ? Company Review - Afrox

    ? April Buys and Sells

Dr Gad Ariovich, editor and Investment Consultant

    Contributors: Desmond Esakov, Charl Marais

SA Consensus Outlook

    Ave 90-009899000102SA - Business Cycle IndicatorsBusiness Cycle Indicators Lead104.2102.5106.4119.1122.5134.6Lag96.996.591.188.993.4Coincident93.993.489.693.596.298.1 130The coincident indicators suggest that the economy has Leadbeen on an upswing since mid-1999, but not with great 120momentum. The rise in the leading economic indicators

    probably signals a continued economic recovery. 110 Source: Reserve Bank 100Lag 90Coincident




     SA GDP

    Ave 90 - 00990001020304

    SA - GDP (2.0)3.13.16 2002 - SD = 0.4 High = 2.8 Low = 1.3 Median = 2.0

     2003 - SD = 0.4 High = 3.8 Low = 2.1 Median = 3.05 4In line with the leading indicators the consensus

    suggests higher economic activity over the next three 3years, but at not particularly exciting rates. 2

    The GDP growth rate forecast for 2002 was revised 1upward in March to 2.1% from 2.0% suggested three 0months ago. -1 -2Source: Beeld Newspaper and Reuters -3



     SA- Growth Rate Private Consumption

    Ave 90-0099000102

    SA - Growth Rate Private Consumption (2.0)

    Expenditure2002 - SD = 0.5 High = 3.0 Low = 1.0 Median = 2.2 Private consumption expenditure (PCE), the lion‟s 8.00share of GDP, is forecast to grow at 2.2% during 2002

    in comparison with 2.0% predicted three months ago. 6.00This upward revision is probably due to the expected

    increase in GDP and hence the additional consumption 4.00that should follow.

     2.00 Source: Beeld Newspaper 0.00


    -4.00 90919293949596979899000102


    SA Gross Domestic Fixed Investment

    Ave 90-0099000102

    SA - Gross Domestic Fixed Investment1.6- (1.9) The Achilles heel of the South African economy is 12revealed when we look at fixed investment growth in

    10the economy. Over the last ten years GDFI grew by an annual average of only 1.6%. 8 6However, most economists foresee an improvement 4in GDFI, which is expected to grow by 3.3% this 2year compared to the 1.9% that was forecast a quarter 0ago. -2

    -4 -6 -8 -10 90919293949596979899000102

    SA Government Expenditure

     %SA - Government ExpenditureA positive trend in the South African economy was 25the declining rate of government expenditure. This

    may be a symptom of tight fiscal policy (other things

    being equal). 20In his budget speech in February the Minister of

    Finance announced his intention to increase

    government capital expenditure. This is contrary to 15the policy of the previous regime when most budget

    increases were directed towards consumption Trend10expenditure i.e. salaries and remuneration of civil


    5 Source: Department of Finance



    SA Inflation (CPI)

    Ave 90 - 00990001020304 (7.0)5.95.2

     2002 - SD = 1.0 High = 9.5 Low = 5.5 Median = 7.6

     2003 - SD = 0.7 High = 7.1 Low = 4.0 Median = 6.0 The consensus suggests an increase in the inflation

    rate from 5.7% in 2001 to 7.5% this year. With the

    heavy depreciation of the rand last year this estimated

    increase in inflation was inevitable.

    These rates are significantly higher than rates in the

    developed world. Even among emerging countries,

    such rates are not considered to be acceptable.

    The consensus however suggests lower inflation rates

    in both 2003and 2004, most likely due to a possible rebound in the R/$ exchange rate (or at least more

    moderate fall in the future) and the Reserve Bank‟s

    decision to implement a tighter monetary policy.

     Source: Beeld Newspaper and Reuters


    SA Inflation (PPI)

    Ave 90 - 00990001020304SA Inflation - PPI% (8.9)6.95.7142002 - High = 11.1 Low = 7.0 Median = 8.6 12The consensus forecast for the PPI has been revised

    significantly upwards from 7.8% to 12.7% for 2002. 10This is a high rate of inflation by international

    standards and is due to a much weaker rand over the 8last nine months. However, with the forecast

    predicting a consolidation in oil prices and slower

    depreciation in the external value of the rand, 6increases in the PPI index are likely to decelerate in

    2003 and 2004 as indicated by the consensus 4forecast.

    2 Source: Reuters 0 9495969798990001020304

    SA Current Account RAve 90 - 00990001020304SA - Current Account

    -2246.7-3398.0-4885.7-1357.7-856.7-571.0#REF!150002002 - SD = 9167 High = 38700 Low = -25700 Median = -3750 10000 Current Consensus: -856.7 Previous Consensus: -21940 5000

    The melting-down of the rand exchange rate and 0lower economic activity tend to result in smaller

    current account deficits. The consensus view suggests -5000that this year there will be a more balanced current -10000account.

     -15000Source: Beeld Newspaper and Reuters -20000 -25000 909192939495969798990001020304

    R153 Interest Rate %Ave 90-00990001020304R153 - Interest Rate

    15.114.813.811.312.2 (11.8)11.911.2222002 - SD = 1.0 High = 14.3 Low = 10.3 Median = 12.3 20The consensus suggests higher long-term interest

    rates. This is probably a result of higher inflationary

    expectations over the medium term. 18During the last three months the consensus view on

    bond yields for 2002 was revised upwards from 1611.8% to 12.2%.


    Source: Beeld Newspaper and Reuters 12




    SA Prime Rate

    Ave 90-00990001020304%SA - Prime Rate18.518.014.513.816.0 (14.9)14.513.0

    2002 - High = 16.0 Low = 14.0 Median = 15.025 The consensus for the average prime rate for this year

    has been revised up to 16.0% from the 14.9%

    suggested three months ago. It predicts however a 20decline over 2003 and 2004.

     15 10



    Rand/Dollar Exchange Rate R/$Ave 90 - 00990001020304Rand/Dollar Exchange Rate (12)12.514.3162002 - SD = 0.8 High = 13.75 Low = 10.2 Median = 11.8 14The consensus forecast for the rand dollar exchange

    rate has been revised from 12.0 R/$ just 3 months ago 12to 11.8 R/$ at the end of 2002. Thereafter the

    consensus suggests a depreciation to 12.5 R/$ during 102003 and 14.3 R/$ in 2004. This outlook is more

    positive than the consensus view three months ago. 8

    (Contrary to the consensus view, we believe that the 6rand will be stronger by the end of the year.)


     2Source: Beeld Newspaper and Reuters 9495969798990001020304

    SA - Gold & Oil Prices

    Ave 90-0099000102SA - Gold & Oil Prices


    Oil19.318.528.524.225.045040 Gold Current Consensus: 290.4 40035Previous Consensus: 286.4

     350Gold30Oil prices are expected to fluctuate around 25 dollars

    per barrel in 2002, depending quite heavily on the 30025situation in the Middle East. The gold price is

    predicted to be on average 290 dollars compared to

    286 dollars that was anticipated three months ago. 25020 Oil20015Source: Beeld Newspaper and Primark




    Technical Notes

    ? Figures in tables in parenthesis represent previous consensus forecasts.

    ? Light grey lines and boxes represent forecast values.

    ? SD = standard deviation of forecast, High = highest forecast value, Low = lowest forecast value.

    ? Acknowledgement: Beeld Newspaper, Reuters and SACOB monthly surveys among SA industrialists for

    consensus forecasts. Primark and I-Net Bridge for historical data.

The Benefits of being Patient in Investment

The Anglorand Investment Committee meets every Tuesday to discuss and make investment decisions. It consists of not

    less than eight people. Two members of the Committee, Charl Marais and Gary Cahn, are traders by nature and

    strongly believe in making money by trading and relying on technical analysis. Three other members, Richard

    Bonnichsen, Desmond Esakov and David Palmer advocate a much longer-term investment horizon, but they are open to

    some trading and technical analysis as a tool to reveal market sentiments. Yigal Pakter and I, Gad Ariovich, the

    Portfolio Manager, strongly believe in fundamental analysis. Being an ex-academic (I was a lecturer at Wits University

    for several years) I also have a great respect for the so-called “Efficient Market Hypothesis”. The Chairman, Harold

    Berenstein, conducts the meetings and eventually we all try to resolve the debate into investment decisions.

    Altogether we represent more than a hundred years of investment experience. It is no wonder that we clash regularly

    during our investment meetings but in a productive and friendly way. The debate among members of the committee is

    derived from different investment schools, different investment beliefs and different personalities. It may be interesting

    to review the different schools, beliefs and opinions so as to understand how we arrive at our final investment decisions.

The arguments of members who belong to the trading school and technical analysis.

    The trading school claims that you can read market sentiments and subscribe to make money by correctly reading short-

    term price developments. There are many sub-streams in the trading school and one of the most prominent believes

    that you can derive from historical price and volume patterns price developments in the future. The trading school is

    very common amongst securities‟ firms perhaps because it encourages trading, with the end result being commissions

    for the stockbrokers whether the clients advisors are right or wrong.

    It is perhaps worth indicating that both Fundamental analysts and proponents of the academic school of Modern

    Portfolio Theory have no great respect for technical analysis.

The arguments of members who belong to the fundamental school

    The fundamental school claims that you can select a company by in-depth study of the firm and its driving forces. In

    practice, the main tool of the fundamental analyst is the financial statements of the company. It is perhaps for this

    reason many of the top fundamental analysts have in-depth knowledge of accounting. Perhaps an in-depth analysis of

    the firm by interviewing management, suppliers, customers and, even more so, its competitors would better reveal the

    true value of a company than its financial statements. In practice, it is very seldom that analysts will go all the way to

    study the company and the latter is by far more common than the former, the reason being the high costs involved and

    the tendency to over-emphasise their marketing function. The analysts are also biased towards maintaining good long-

    term relationships with the investigated firms and therefore try to soften negative points. There are very few

    independent research organisations and most company research is done by stockbrokers. The fundamental school faces

    tough scrutiny in terms of Modern Portfolio Theory which argues that companies financial statements are well known to

    the market and therefore the results are fully embodied in the share price. Consequently, academics argue that there is

    very little value added by just analysing financial statements of companies.

The arguments of adherents of MPT

    The future is basically unknown to us and events will keep surprising us. Thus, the best strategy for coping with the

    unknown future is by effective diversification of investment portfolios. MPT also suggests that the only way to beat

    the performance of the JSE equity index is by assuming more risk. For instance, having a portfolio of warrants may

    beat the performance of the JSE Overall index but the risk of losing your investment and suffering losses is by far

    bigger. Critics of the school argue that the school represents an unenterprising approach to investment attitude and

    mediocrity. In its extreme form, the investor can buy any share and assume that the prevailing price reflects the value

    of the share (what a lazy way to invest !)


The Anglorand way of investment

    Having been in the investment field for many years, most of us have certain humility about reading future developments

    in current financial markets. Diversification, diversification and diversification are therefore our number one rule in

    handling the client money. Over my many years of experience, I have seen many clever people burning themselves and

    wiping out the wealth of clients by taking a specific strong view about the future and avoiding diversification.

We also respect fundamental analysis and strongly believe that it is important to buy solid companies. We have our

    reservations, however, about the predictability of share prices by fundamental analysis, especially in the short term.

    We use fundamental analysis intensively to identify undervalued companies, especially in relative terms by applying

    Dividend Discount Models (DDM) and PEG ratios. We also develop our own proprietary models to reveal

    over/undervalued situations with respect to JSE industries and to specific shares.

We do not dismiss technical analysis as a tool for revealing investment sentiments in the market and trying to capitalise

    on short- term price fluctuations. It is in the trading areas that the Committee faces the biggest differences of opinion

    among the members. The traders and technical analysts believe that short-term opportunities should often be exploited.

    Other members, including myself, believe that short-term trading opportunities are rare and that we should be very

    conservative in trying to capitalise on what is perceived to be a trading opportunity. I do believe however that shares

    have plenty of random price fluctuations. Also, market sentiments could push a share price to be grossly above or

    below its intrinsic value. Thus, one should try and “catch” the good shares at a good price from value point of view.

    This means a conservative strategy of „range trading‟. If a share falls to what we believe is a very good fundamental

    price, we should buy and vice versa. MPT suggests that such opportunities are probably seldom and that one should not

    therefore over do it. I believe that by patience and by resisting the temptation to trade frequently money can be made for

    clients in addition to the basic price trends Committee members however who believe in technical analysis would like

    to exploit what they perceive as trading opportunities far more often than the fundamentalists

Our trading in Anglo shares may be a case in point. For historical reasons, our ex Aurica clients were not exposed to

    Anglo shares. All members of the Committee agreed that for the sake of diversification Anglo shares should be

    incorporated in our portfolios with possible range trading. When the share price dropped from above R200 to R185, a

    majority of the committee members believed that it was “a good enough price to buy at” and we should not wait

    indefinitely. Other members with more patience, including myself, argued that we could probably get Anglo shares

    cheaper, say, below R160 if we are patient enough. Of course, only the future will tell who was right - as one

    committee member commented smartly “Knowledge is important in investment but luck is essential”.

Company Review: Afrox

Afrox Price bought: 1230

    ? African Oxygen Limited is in the business of gasses, welding products and healthcare. The company has a

    market capitalisation of over R3.5 billion. The group comprises two focused listed companies, the latter

    listing being Afrox Healthcare, which is listed in the healthcare sector of the JSE. Afrox owns 82% of

    Afhealth. Afrox is 55% owned by the BOC Group, one of the world‟s leading gas companies and the most

    global. Afrox operates throughout South Africa as well as in 12 other African countries and exports

    products to Australia and Malaysia.

    ? Industrial contribution 57% and health care 43%.

    ? Interim results show HEPS up 26%

    ? PEG average 0.75 PEG 1 = 0.65 Forw PE 10.6. The company therefore seems to be offering fair to good

    value on a forward earnings scenario.

    ? Around 15% below Fair value on DDM (Dividend discount model).

    ? Continuous growth in HEPS over last 5 years

    ? Since listing in 1964 Afrox has increased dividends payments every year except one, which was the same

    as the previous year.

    ? Beta 0.69 very defensive

    ? Excellent increase in cash generated from operations during 2001, up 56% to R982 million. Although only

    R47milion on balance sheet, during the last half of the current financial year just under R400 million was

    spent on capex mainly on new hospitals. CEO however expects good cash generation again this year.

    ? Solid if not spectacular but good long-term hold.


April Buys (B) and Sells (S)

     Buy price Sold price Current price AGL(B) 18500 17250 BIL (B) 6500 5900 GFI (S) reduced 11400 12700 KMB(S) reduced 4900 4150

Senior Staff

    David Lewis, CEO; David Palmer, Director, Head Dealer; Adriaan Kamper, Financial Director; Yulindi Taljaard, Compliance Director and Settlements Manager.

The Investment Committee

    Harold Bernstein, Chairman; Dr Gad Ariovich, Investment Manager; Dr Richard Bonnichsen; David Palmer Gary Cahn; Charl Marais; Desmond Esakov.

Anglorand Securities; rd Tel: 011 - 484 7440 Fax: 011 484 6647; 3 Floor, Werksman Chambers, 22 Girton Road, Parktown, 2193.


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